Friday, May 29, 2015

When the Bubble Bursts

by Osman Parvez
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The gig is up. 

The economy is much weaker than expected. Odds are almost nill that interest rates will rise in September, much less in October or November.   Too much cash has been chasing too little inventory in Boulder, creating bidding wars for even marginal properties.   Prices have risen quickly.

This is called a bubble.   Like all bubbles, it will burst. 

During the last downturn, Longmont saw sales stagnate and inventory pile up first. Longmont also corrected faster.   Louisville and Lafayette followed.   Boulder held up better. 

How do we know?  Because we've been closely tracking real estate in the Boulder area for more than a decade.  And we were there when the market started to correct itself the last time around.  This isn't the usual Realtor happy talk and hand waving.

Within our local markets, the high-end saw the steepest price declines.   At one point, there was more than 2 years of inventory on the market in Boulder for homes priced above $1MM. Niwot was even worse, with nearly 3 years of inventory for luxury homes.  Unproven locations throughout Boulder County saw the most bloodshed.  It was the opposite story at the entry level (unimproved 3 bedroom ranches in Baseline and Martin Acres, for example). This segment was the last to correct, with a brief period (about 3 months) where prices declined about 5%.    

Will history repeat itself?   
This time around, lending standards have been far stricter.  There are no liar loans. Owners are better qualified and have far more equity in their property in this cycle.   Builders have also not caught up with fundamental demand, especially here on the Front Range.   

All of this suggests the coming downturn may be longer and less steep, or that the market will have a soft landing.   It would take a much more severe economic downturn to repeat history.   It may even mirror the 2000-2004 period of more sustainable growth before it comes down, but make no mistake.  It will correct itself eventually. 

We are very likely at or nearing the top of the bubble. Homes at lower price points, in better locations, and which meet the needs of a majority of buyers will fare better when the market corrects itself.    

As before, the marginal areas of the market will bear the most pain.   

As a buyer or seller, what can you do?    
Don't just choose any Realtor.   Choose one who thinks and acts as your real estate adviser. Choose one with 12+ years of experience and a proven track record of success

Buyers:  Choose your real estate carefully.  Not all properties are worth the asking price, much less entering into a bidding war.    A good real estate adviser can guide you through the smoke and mirrors.  Whether you're buying for your personal residence or for an investment, there is no substitute for careful property selection, disciplined negotiation, and proper due diligence.  When the market starts to get bubbly, head for safety. 

Sellers:  if you've been holding onto a marginal or thinly traded asset, now is the time to sell.   I'm talking about properties in bad locations, ones that need substantial repairs, that would be expensive to upgrade to meet Smart Regs, or would be difficult to sell in weaker markets.  I'm also talking about higher-end homes because the buyers of these properties tend to have substantial capital market investments.   When the stock market takes a header (which it always does), so will the market for $1MM+ homes.   My advice is to unload now.  Choose a listing agent who knows the market for high end homes on a neighborhood by neighborhood level.  

Yes, there's a risk that prices will be even higher next year and you left money on the table.  There is always that risk.   Remember one thing.   It's exceptionally difficult to call the very top or bottom.  The smart money sells into a rising market and acquires after it's clear the downturn has begun at prices below intrinsic value.   

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

2 comments:

  1. You cannot have a bubble and a soft landing. As wikipedia states, "As it stands, these forecasts have very little scientific value and there is not one single verifiable instance of a soft landing following an economic bubble. This is enforced by definition, as any potential bubble followed by a soft landing would, in retrospect, not be deemed a bubble."

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  2. And yet at the same time, after the last bubble - some markets were a bloodbath (Phoenix, Vegas, Miami, most of California) and others were much smoother (Boulder, Seattle). Was that a soft landing?

    Either way, I'm not interested in arguing a definition of a bubble. I'm interested in helping my clients understand risk and maximize their real estate opportunities, buying or selling. In this market, this means helping buyers avoid getting crushed when the market turns through careful property selection and not overpaying. It also means helping sellers liquidate crappy assets that would otherwise be difficult to unload in a normal or down market.

    The market will turn. It always does. The fun part is finding out who was swimming naked when the tide finally goes out.

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